Traverse Analysis: Progenitors and Pioneers 14th History of Economic Thought Society of Australia Conference The University of Tasmania, Hobart, Australia. 11th July 2001 Colin Richardson* School of Economics University of Tasmania ABSTRACT Traverse analysis has two progenitors (David Ricardo, Karl Marx) and five pioneers: Michal Kalecki, Adolph Lowe, Joan Robinson, J.R. Hicks, and John Hicks. Defined as the dynamic disequilibrium adjustment-path that connects an initial with a different terminal state of economic growth, the traverse comes in four “flavours”. There are neoclassical (J.R. Hicks), neo-Austrian (John Hicks), observed (Ricardo, Marx, Kalecki, Robinson), and instrumental (Lowe) traverses. These terms are explained and the seven seminal contributions are summarised and commented upon in this paper. * I am indebted to Dr Jerry Courvisanos for his supervision and comments in writing this paper. Scholarship support from The University of Tasmania is also gratefully acknowledged. 2 Introduction Nobel laureate economist Robert Solow once quipped: “The traverse is the easiest part of skiing but the most difficult part of economics”. Later, Joseph Halevi and Peter Kriesler (1992, p 225) complained that “The traverse is at the same time one of the most important concepts in economic theory, and also one of the most neglected.” This paper outlines briefly the history of economic thought between 1821 and 1973 concerning this difficult, important and neglected theoretical construct. Traverse analysis has two progenitors (David Ricardo, Karl Marx) and five pioneers: Michal Kalecki, Adolph Lowe, Joan Robinson, J.R. Hicks, and John Hicks. Defined as the dynamic disequilibrium adjustment-path that connects an initial with a different terminal state of economic growth, the traverse comes in four “flavours”. There are neoclassical (J.R. Hicks), neo-Austrian (John Hicks), observed (Ricardo, Marx, Kalecki, Robinson), and instrumental (Lowe) traverses. These terms are explained and the seven seminal contributions are summarised and commented upon in this paper. Ricardo and Marx are first identified as the original progenitors of the traverse concept. Next, the work of those pioneers who did most to convince the economics discipline of its importance for dynamic analysis is discussed, viz. the contributions of Kalecki, Lowe, Robinson, J.R. Hicks, and John Hicks1. Finally, this excursion into the history of economic thought is used to isolate four separate definitions of the traverse: the neo-Austrian, neoclassical, instrumental, and observed traverses, of which the last is argued to be the most relevant. As an afterthought, it is conjectured that there may exist a vast trove of misrecognised traverse analyses, a “hidden literature” treating this dynamic disequilibrium process in a translucent, implied or even opaque, fashion. If this conjecture proves accurate, there is much scope for historians of economic thought to carry out research into the way economists have handled what we now recognise as traverse processes. 3 Two Progenitors In 1821 Ricardo (1817) analysed the dynamic process of machines-labour substitution in Chapter 31 – On Machinery, which he added to the third edition of his Principles of Political Economy and Taxation. This was a recantation of Ricardo’s previous belief that the process benefited all classes of society. "I am convinced”, he wrote in the new chapter, “that the substitution of machinery for human labour, is often very injurious to the interests of the class of labourers" (p 388). Ricardo’s traverse analysis showed that his previous belief remained true, but only as a long-term proposition. In the short to medium term, he demonstrated, the working class would have to endure transitional unemployment as machinery displaced labour. In 1885 an "embryonic consideration" of traverse phenomena appeared in Volume II of Capital by Marx (1885). Halevi & Kriesler (1998) note that Marx analysed “… the nature of the flows between the capital goods producing sectors and the consumption goods producing sectors … In order to avoid disproportionality crises, Marx showed that certain conditions must be fulfilled by these flows. However, he also concluded that the satisfaction of these conditions was extremely unlikely in a capitalist economy … this prepared the space for the analysis by Lowe and Hicks of the structural traverse …” (p 1). With their neo-Marxian credentials and mutual respect, it can be said that Kalecki and Robinson also occupied this prepared space. On their respective publication dates, Ricardo’s chapter and Marx’s volume each created a furore among economists. Gregory Claeys & Prue Kerr (1981) mention that “McCulloch was particularly angry, and wrote to Ricardo ‘the Chapter on Machinery … is a very material deduction from the value of the work’ … He had been convinced previously to change his own views by Ricardo’s initial arguments for the benefits of machinery.” (p 254, n1). As early as 1886 there were attacks on Volume II of Capital by Wilhelm Lexis and Achille Loria. David Ricardo Ricardo’s historical-time traverse analysis pivots on two fulcra. The first is his distinction between a £15,000 gross and a £2,000 net produce of a business enterprise, the £13,000 difference being the 1 According to John Hicks (1975, p 365), he disowned his original identity (as the neoclassical economist, “J.R. Hicks”) by publishing Hicks (1969), A Theory of Economic History. See also Hicks (1979). 4 capitalist’s “wage fund”. The second is the power of saving = investment from an increasing net produce (i.e. classical “commodity surplus”) to add to the circulating capital of the enterprise (p 388). A capitalist we will suppose employs a capital of the value of 20,000l. and that he carries on the joint business of a farmer, and a manufacturer of necessaries. We will further suppose, that 7000l. of this capital is invested in fixed capital, viz. in buildings, implements, &c. &c. and that the remaining 13,000l. is employed as circulating capital in the support of labour. Let us suppose, too, that profits are 10 per cent., and consequently that the capitalist’s capital is every year put into its original state of efficiency, and yields a profit of 2000l. Then, in the opening year of Ricardo’s traverse, this capitalist diverts half his workforce to construct a £7,500 machine, so that only £7,500 worth of circulating capital is reproduced that year, of which £2,000 flows to him as his usual surplus. In the following year, therefore, his wage fund will be only £5,500 worth of wage-goods with which to offer employment. So he fires all the machine-builders and more than one-quarter of those who lately were producing “corn” and (other) “necessaries”, i.e. wage-goods. By utilising the highly-productive new machine, this drastically-reduced workforce thereafter annually turns out a gross produce of £7,500-plus, and the capitalist is content to receive at least his usual profit of £2,000, after replacing the £5,500-plus wage fund of circulating capital. In addition, the unit costs of production of these wage-goods – hence also their prices – will have fallen due to mechanisation of the production process for corn and necessaries. Ricardo then generalises this labour-saving impact to the entire economy (p 390). In this case, then, although the net produce will not be diminished in value, although its power of purchasing commodities may be greatly increased, the gross produce will have fallen from a value of 15,000l. to a value of 7500l., and as the power of supporting a population, and employing labour, depends always on the gross produce of a nation, and not on its net produce, there will necessarily be a diminution in the demand for labour, population will become redundant, and the situation of the labouring classes will be that of distress and poverty. 5 After a few more years of transitional adjustment along the traverse-path, however, this situation will be ameliorated (and perhaps even corrected) because … with the same wants he [the capitalist] would have increased means of saving, – increased facility of transferring revenue into capital. But with every increase of capital he would employ more labourers; and, therefore, a portion of the people thrown out of work in the first instance, would be subsequently employed; and if the increased production, in consequence of the employment of the machine, was so great as to afford, in the shape of net produce, as great a quantity of food and necessaries as existed before in the form of gross produce, there would be the same ability to employ the whole population, and, therefore, there would not necessarily be any redundancy of people. As for the duration of this traverse, Ricardo said that “These savings, it must be remembered are annual, and must soon create a fund, much greater than the gross revenue, originally lost by the discovery of the machine, when the demand for labour will be as great as before …” (p 396, italics added). Thus, the economy may successfully negotiate the traverse and “soon” return to its former stationary state. This historic first-ever traverse analysis has all the right hallmarks. An initial dynamic equilibrium (a stationary state, in this case) is disturbed by a parameter-change. This sparks off a transitional disequilibrium adjustment-path which lasts for some years before a final state of dynamic equilibrium (also a stationary state) is successfully attained. “On Machinery” was written less than five years after Britain’s parliament had despatched 12,000 soldiers to quell the machine-breaking activities of Luddite textile workers opposing the introduction of mechanical weaving looms. And in France, the original saboteurs had been casting their wooden clogs into the mechanisms of the new Jacquard looms. Given this political climate, it was courageous of Ricardo to publish his traverse analysis and to conclude “That the opinion entertained by the labouring class, that the employment of machinery is frequently detrimental to their interests, is not founded on prejudice and error, but is conformable to the correct principles of political economy.” (p 392).